As mass production has to be accompanied by mass consumption; mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery.-- Marriner Eccles

The good thing about science is that it's true whether or not you believe in it.-- Neil deGrasse Tyson/2015 (possibly earlier)

There is still a lot of thinking on the right that if big corporations are happy, they're going to take the money they're saving and reinvest it in American workers. In fact they bought back shares, a few gave out bonuses; there's no evidence whatsoever that they[sic] money's been massively poured back into the American worker.-- Marco Rubio (darling of the Right)/2018

25 April 2013

Down the Rabbit Hole

Trifecta. Three's a crowd. Win, place, and show. Three strikes, and you're out. Could be worse; there's a fourth item I'm too lazy to delve into.

So soon, you forget, eh? Today's reporting demonstrates that The Powers That Be still don't get it. All their quants doing all their voodoo (I happened to find my way, yet again, to Salmon's piece on Li; so should you), and they all refuse to accept the obvious.

In his study, Professor Quercia of the University of North Carolina found that loans that complied with those rules defaulted at a relatively low rate during the housing bust. About 5.8 percent of them went bad, irrespective of how much the borrower put down.

This is The Truth, since it's the converse of what's shown in Viagra in the home: you can't have increasing home prices in a state of stagnant (or declining) median income without some serious fiddling going on.

The argument that down payment makes a difference is a joke. What matters is debt load. The subprime ARMs, in fact all contractual ARMs, would still have exploded irregardless of down payments made. Push up the house vig after two or five or seven years, and the mortgage holder sinks. Unless his/her income has increased concurrently; but, of course, that hasn't been happening for years. Builders, and perhaps lenders, want house prices to always grow, since that's how they continue to make mo money.

Arguments to the contrary, and there's a plenty of them discussed in the piece, pushing the envelope on affordability never ends well. The creation of the various ARMs was not at the behest of home buyers, but of those on the other end(s) of the process. Builders preferred to make 4,000 square foot McMansions. Banks preferred them as well, if only for the larger fees that higher prices brought. In order to accomplish this, however, a way to move folks into mortgages they couldn't have afforded under The Olde Rules necessitated making some new rules. And so it was.

Fiddling with down payment levels won't make much difference, and then not necessarily positive for the economy. The evil part is the ARM. ARM is fine and dandy during periods of macro-inflation; wages lead/lag prices, but move closely enough in concert that the "real" cost of the mortgage stays more or less level. In these (semi-)deflationary times, contractual ARMs (where the rate ratchets at aging points irregardless) will fail. (If there're any who still think such never actually existed, read this.) The only serious avenue is to outlaw contractual ARMs. Prime adjusted ARMs are nearly as bad, when the economy is as out of whack as it is today.

That Giant Pool of Money is still out there, looking for a "risk free" sinecure paying 10%. It ain't gonna happen, but they'll keep trying.